Some food for thought
"I may neither choose who I would, nor refuse who I
dislike; so is the will of a living daughter curbed by the will of a dead
father. "
—William Shakespeare (English writer 1564-1616)
Word for the day
Qua (adv)
As; as being; in the character or capacity of. For example, The
work of art qua art can be judged by aesthetic criteria only.
First thought this morning
Tumbling stock prices, sagging business sentiments, outcry on
social media against anti business policies of the government have all failed
to motivate a review of tax proposals in the Union Budget for FY20. The government
and IT department are showing strong determination to retain the proposal to
impose higher tax on super rich, including the foreign investors not registered
in India as a corporate entity.
After three weeks of persuasion and threats, it seems the tax
payers are beginning to reconcile with the new reality. The demands are now
narrowing down to "at least exempt foreign sovereign funds from this
surcharge" and "Please do not charge interest/penalty on June advance
tax installment, which was paid before budget and did not consider this
surcharge in calculations".
I am not sure how to react. Congratulate the government for
holding its ground firmly, or regret choosing a government that is not bothered
about the serious repercussions of a questionable decision.
Chart of the day
Crisis of Confidence
I received a number of comments on yesterday's post regarding
sagging business sentiment in India (see
here).
Except for their email addresses, I do not have any other
information about the respondents. Therefore, it is not possible to make a
qualitative analysis of their views. Nonetheless, a rudimentary view could
certainly be formed based on these comments.
The commentators broadly appear divided in three camps, insofar
as the factors affecting business confidence in India is concerned.
(a) The largest camp
believes that lower business confidence is function of excessive controls and
compliance pressure imposed on businesses in past 5years. This group believes
that despite great promises, the NDA government has not been able to obliterate
the growth impediments that caused "policy paralysis" during late
years of UPA2 government. For example-
The sustainability conflict has actually exacerbated in past
five years with businessmen, policymakers, regulators, and judiciary taking
divergent views, leading to avoidable, repetitive, protracted litigation.
Decision of Bombay High Court to stay construction of Mumbai Coastal Road
Project, is the latest example of this conflict.
Overreach of tax authorities to tax payers has crossed the line
of harassments. Taxmen are supposedly under tremendous pressure to extract
maximum revenue to fill the fiscal gap. This pursuit of tax maximization is
bordering the line of extortion, making even honest taxpayers fearsome and
frustrated. One respondent highlighted how the IT department did not
acknowledged the self assessment tax paid by him and issued a huge demand
notice. The reply to e-proceeding did not elicit any response for months. He
was called to the IT office personally and bluntly told to pay the demand and
claim refund later.
Similarly, there are several glitches in GST system, which are
not in the priority of the department for correction. For example, the status
of GST refunds for the bills which remain unpaid due to inability of the
customer to pay or litigation/dispute is still not clear. Moreover, IT
authorities are usually matching the GST return and revenue reported in the IT
returns and making it a case of misreporting of income and tax evasion, liable
for penal action.
(b) People in second
camp appear to be of the view that the sagging business confidence is function
of two factors: (i) over-expectation from the government which have naturally
been belied; and (ii) cyclical economic slowdown that has resulted from tight
liquidity conditions, high real rates, stagnant real wages in private sector,
NPA cycle, global demand slowdown, and rise in household leverage causing poor
consumption demand growth. This group feels, that the cycle could be reversed
by usual measure like rate cuts, more cash in consumers' hand (fiscal and
monetary stimulus), tax incentives for private investment, easier liquidity and
lenient credit terms.
(c) People in third
camp are in minority, but most vociferous. They feel that the businesses that
have traditionally prospered on the back of state patronage, unfair
exploitation of resources (labor, capital, natural resources etc) and tax
evasion deserve to be handled with iron hand. These businessmen need to learn
to play by the rule book, pay due taxes, comply fully with sustainability,
corporate governance & other regulations, desist from excessive
profiteering, pay market price for land, capital, wages, and other natural
resources and obey the law of land in letter and spirit. If this means few
quarters or even years of slower growth, the pain would be worth every pang of
it.
My final take on the issue could be summarized as follows:
It would be a mistake to view the present state of poor economic
sentiments as a simple economic problem catalyzed by mistrust between the
government and businesses, higher taxation, tighter liquidity or down sloping
demand cycle. The roots of the problem are much deeper. I feel, besides the
usual economic problems listed above, the following factors could also
responsible for the sagging sentiments, both for consumers as well businesses.
(a) The fast changing
technology landscape is making many businesses redundant. Largest ever number
of medium and small sized businesses who do not have wherewithal to adopt new
technologies are facing existential risk. Many large legacy businesses which
have been lethargic in timely adoption of new technologies are finding it tough
to compete with the smart businesses which adapted to the change early and
raced ahead.
(b) Globalization of
Indian economy is happening at accelerated pace now. Every quarter some new
area of business is being thrown open to global competition. The businesses that
have been used to operate in protected environment with full state patronage
are naturally finding it hard to compete with global businesses with access to
larger capital, better technology and wider markets.
(c) The fast
changing technologies are also leading to higher rate of workers redundancies.
Besides, the compulsion of businesses to become more flexible and lean is also
causing the insecurity amongst the employees to rise. Rising job insecurities,
erosion of wealth effect due to depressed real estate prices, and poor
visibility of professional growth, and elevated household leverage could be
some of the reasons for poor consumer sentiments.
Breakdown of dialogue between the government and businesses post
Demonetization has deepened the mutual mistrust. The first step to resolve the
crisis of confidence must be to bridge this gap and reestablish the dialogue.
Making the economic development and growth a one way street, where only the
government dictates the terms, may not work under the present circumstances.
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